Strict Liability versus Negligence in a Market Setting

This paper formally analyzes strict liability and negligence in a market setting. The discussion emphasizes the impact of the rules on the market price and on the number of firms in the industry. For simplicity, the damage caused by each firm is assumed to be determined only by that firm's "care" (and not also by the firm's output or the victim's behavior).

Optimal Liability when the Injurer's Information about the Victim's Loss is Imperfect

A central result in the economic theory of liability is that, if an injurer's liability equals the victim's loss, then either the rule of strict liability or the rule of negligence can induce the injurer to behave properly. However, for this result to hold, the injurer must know the victim's loss before the injurer decides whether to engage in the harmful activity and, g fortiori, before any harm has occurred. This paper reevaluates the rules of strict liability and negligence when the injurer's information is imperfect. Two questions are addressed: Under each rule, should the level of liability imposed on the injurer still equal the victim's loss? Are the rules of strict liability and negligence still equally desirable? With respect to the first question, it is demonstrated that the optimal level of liability generally is not equal to the victim's loss. With respect to the second question, it is shown that if the injurer's liability equals the victim's loss, then the two rules are equivalent, but if liability is set optimally under each rule, then strict liability generally induces the injurer to behave in a more appropriate way.

Detrebling versus Decoupling Antitrust Damages: Lessons from the Theory of Enforcement

This continent compares two alternative systems of private antitrust enforcement. In one (referred to as the "damage multiplier approach"), the plaintiff receives what the defendant pays; in the other (the"decoupling approach"), this constraint is not imposed. Reducing treble damages to single damages("detrebling") would be an example of the first approach. Making the defendant pay treble damages while only giving the plaintiff single damages would be an example of the second approach. It is shown, using the principles of the the economic theory of enforcement, that the decoupling approach is preferable to the damage multiplier approach, and that the optimal system of decoupling could award the plaintiff more or less than what the defendant pays. Several additional issues are raised that need to be considered before decoupling can be recommended in practice.

The Optimal Use of Fines and Imprisonment When Wealth is Unobservable

This article studies the optimal use of fines and imprisonment when an offender's level of wealth is private information that cannot be observed by the enforcement authority. In a model in which there are two levels of wealth, I derive the optimal mix of sanctions, including the imprisonment sentence imposed on offenders who do not pay the fine -- referred to as the "alternative" imprisonment sentence. Among other things, I demonstrate that if imprisonment sanctions are used, the optimal alternative imprisonment sentence is sufficiently high that high-wealth individuals prefer to pay a fine exceeding the wealth level of low-wealth individuals and bear a lower (possibly no) imprisonment sentence rather than to pretend to be low-wealth individuals. I also show that if the optimal enforcement system would rely exclusively on fines when wealth is observable, the inability to observe wealth is detrimental because higher fines then could not be levied on higher-wealth individuals. In this case, it may be desirable when wealth is unobservable to impose an imprisonment sentence on offenders who do not pay the fine -- who will be low-wealth offenders -- in order to induce high-wealth offenders to pay the fine. However, if the optimal enforcement system would employ both fines and imprisonment sentences when wealth is observable, the inability to observe wealth is not detrimental. In this case, the same sanctions would be chosen if wealth is unobservable and these sanctions lead high-wealth individuals to pay more than low-wealth individuals.

On the Choice Between Property Rules and Liability Rules

When parties can bargain with each other in an externality situation, it is frequently argued that liability rules are preferable to property rules. The case for liability rules is thought to be strongest when the parties behave strategically, when the collective authority responsible for maximizing social welfare has perfect information, and when lump-sum transfers are not available. It is shown here that liability rules are not generally preferable to property rules in these circumstances because of their limited ability to redistribute income between the parties.

Private versus Public Enforcement of Fines

The present paper analyzes the competitive, monopolistic, and public enforcement of fines allowing for the costs of enforcement to differ by the choice of the enforcer. There are a number of reasons to expect such differences. First, the benefits from coordinating enforcement -- for example, avoiding duplication of investigative effort and exploiting economies of scale in information processing -- are obtained under public enforcement and monopolistic enforcement, but not under competitive enforcement. Second, the profit motive might be imagined to lead to lower costs under either form of private enforcement relative to public enforcement. Third, when the revenue from fines under public enforcement is not sufficient to finance enforcement costs, there may be a deadweight burden incurred in making up the deficit from other sources. Conversely, if the fine revenue exceeds enforcement costs, the effective cost of enforcement would be lower. On balance, these considerations suggest that monopolistic enforcement may be cheaper than competitive enforcement, but that public enforcement could be more or less expensive than private enforcement.

Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation

Thi spaper is concerned with the risk-allocation effects of alternative types of contracts used to set the price of a good tobe delivered in the future. Under a fixed price contract, the price is specified in advance. Under a spot price contract, the price is the price prevailing in the spot market at the time of delivery.These contract forms are examined in the context of a market in which sellers have uncertain production costs and buyers have uncertain valuations. The paper derives and interprets a general condition determining which contract form would be preferred when the seller and/or the buyer is risk averse. In addition, an example is provided in which a spot price contract with a floor price is superior both to a "pure" spot price contract and a fixed price contract.

Economic Analysis of Law

This entry for the forthcoming The New Palgrave Dictionary of Economics (Second Edition) surveys the economic analysis of five primary fields of law: property law; liability for accidents; contract law; litigation; and public enforcement and criminal law. It also briefly considers some criticisms of the economic analysis of law.law and economics, property law, liability for accidents, contract law, litigation, public enforcement, criminal law

Enforcement Costs and the Optimal Magnitude and Probability of Fines

Some of the costs of enforcing laws are fixed" - - in the sense that they do not depend on the number of individuals who commit harmful acts- -while other costs are "variable"- - they rise with the number of such individuals. This article analyzes the effects of fixed and variable enforcement costs on the optimal fine and the optimal probability of detection. It is shown that the optimal fine rises to reflect variable enforcement costs; that the optimal fine is not directly affected by fixed enforcement costs; and that the optimal probability depends on both types of enforcement costs.

Should Liability be Based on the Harm to the Victim or the Gain to the Injurer?

Should the level of liability imposed on an injurer be based on the harm he caused or instead on the gain he obtained from engaging in the harmful act? The main point of this article is that there is a strong reason to favor liability based on harm rather than gain when account is taken of the possibility of legal error. Notably, even a small underestimate of gain can lead an injurer to commit a harmful act when the harm greatly exceeds his gain, causing a large social loss. In contrast, a comparable error in the estimate of harm will not lead an injurer to engage in the harmful act when the harm significantly exceeds his gain. The general superiority of harm-based liability is shown to hold under the rules of negligence and strict liability and regardless of whether potential injurers know the error that will be made.